For an excellent detailed review of the book, check out Dividend Life’s write-up HERE.

Random

It’s been over 40 years since the original edition of this book came out, and the version I read was the 8th edition, revised in 2003 so it didn’t include info on the 2008 financial crisis.

The book describes a Random Walk as:

“one in which future steps or directions cannot be predicted on the basis of past actions. When the term is applied to the stock market, it means that short term changes in stock prices cannot be predicted. Taken to its logical extreme, it means a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.”

More on the “monkey business” later.

Makiel himself suggests that the book’s subtitle could have been “The Get Rich Slowly But Surely Book” as pretty much the whole premise is that in most cases, a simple buy and hold strategy will beat active trading and that in most cases, investments in a cheap index tracker will beat investments in actively managed funds.

I enjoyed reading this book, found the theories interesting to follow, although on occasion, not being completely financially literate, I struggled a little with the odd example but on the whole, I found it relevant, often humorous and full of historical examples, including some outrageous ones from times before financial regulations were in place!

Monkey Magic

Following on from Malkiel’s original comment about blindfolded monkeys performing better than experts, staff at the Wall Street Journal ran competitions pitching monkeys (or rather employees acting as monkeys) throwing darts at a stocks and shares table, against investment experts who picked their own stocks/shares. (Note, this bit isn’t in the book but I found various stories by just Googling “blindfolded monkeys”!).

It appears that 100 such competitions were run between 1988 and 1998, and out of the 100, the investment experts came out on top 61 times.

However, that meant that on 39 occasions, the monkeys did better than the experts!

In addition, when compared to the Dow Jones Industrial Average, the pros only just about won 51 to 49! Go monkeys!

This seems like a (slight) overall victory for the experts but there was the argument that a couple of factors affected the results, including:

The Announcement Effect: by announcing the stocks to the entire audience of the Wall Street Journal, returns were artificially inflated for the stocks picked by the experts (in fact, abnormal gains for the first 2 days after publication scaled back between 15 and 25 days later)

The stocks picked by the monkeys continued to do well: After the contest ended, the monkey stocks continued to perform, while the pros’ picks fell from their initial highs after publication.

Other similar competitions have taken place over the years, with the monkeys not doing too badly!

Recent Blindfolded Monkey

Illustration by Anita Kunz

I came across Afford Anything, who conducted her own ‘blind-folded monkey’ competition in 2014, pitching her darts-selected portfolio against a group of financial bloggers who picked their own portfolios.

She didn’t win and ultimately concluded that it wasn’t a great idea as the stocks that she (as the monkey) picked increased by only 6% compared to the 12.6% increase that the S&P 500 enjoyed in 2014.

However, had she picked the shares from the FTSE 100 and seen the same 6% increase, that would have been deemed a success, as the FTSE 100 saw an overall loss of 2.6% over the same period!

Dividends (reinvested or not) are not mentioned but I thought this was a brilliant and fun experiment – something that I quite fancied having a go myself…..

Monkeying Around

When asked at the recent UK gathering what I had in mind over the coming year for my blog, I decided to share an idea that’s been going round my head for a while…that of creating my own ‘Monkey Portfolio‘! (You were right, DL!)

People laughed but to my surprise, a few liked the mad idea and even said they would join me, suggesting the setting up of a league table!

Hence I’m currently finalising my idea with the assistance of Huw and M so more details coming up on the ‘how’, the ‘what’ and the ‘when’.

Intrigued by ‘Weenie’s Monkey Stocks League‘? (thanks to M for suggesting the name!)

Related

16 thoughts on “Randomly Walking and some Monkey Business”

That's one of the best pieces of advice that anyone can be given when investing; nothing is certain in the short term! It also makes me feel very calm about my investments, as I know I've picked great companies which will continue to grow, pay increasing dividends, and even raise the stock price.

Hi CerridwenThanks for your interest. Maybe you could show us your dart throwing skills in York? 🙂 It's one skill I've never gotten round to learning….so something for me to learn in the future maybe haha!

I might want to join your monkey league too if I get around to purchasing some more stocks!! I think the league would be a great way for people to monitor their investments regularly and maximise their returns.

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This blog documents and tracks my own personal savings, investments and goals, based on Excel spreadsheets which I cobbled together without any professional financial advice nor with any real financial expertise, bar what I've learnt from the internet and newspapers.
I therefore heartily recommend that people do NOT follow or copy any of my decisions on this blog and if they choose to do so without consulting a financial advisor, they do so at their own risk. I shall not be held responsible or liable should anyone choose to ignore the above recommendation.
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